It was Europe’s largest buy-out. In December, the Parmalat scandal brought Italy an equal but less welcome notoriety.

This year has had none of the sparkle of 2003. It would be easy to blame it on the shadow cast by Parmalat. John Leach, managing director of leveraged finance at Barclays Capital, said such comparisons are inevitable but misleading. “The French private equity market enjoyed a phenomenal year in 2002, followed by a very quiet 2003. It’s a feature of European private equity markets that as they develop, they tend to go in cycles.

“There simply isn’t the dealflow to have a year like Italy had in 2003 every year,” he said.

So far this year only the possible sale of Autogrill, a motorway services group owned by the Benetton family and touted to be worth as much as €3bn, has generated real excitement in the market. Several large private equity names, including BC Partners and CVC Capital Partners, flush from last year’s Seat success, were linked to the sale until the Benettons unexpectedly pulled it, citing confidentiality concerns.

Guido Tugnoli, a senior banker at JP Morgan, said: “Private equity groups have too much money and there’s a scarcity of targets in the market. Autogrill was a very important event as big deals are scarce.”

The oversupply of capital relative to dealflow makes private equity firms uncomfortable. Sergio Sambonet, a director at 3i in Milan, said: “There have been very few auctions so far this year, and those we have seen attracted most of the big names, making them very competitive and driving prices higher.”

Stefano Miccinelli, senior partner at Investitori Associati, which closed its fourth fund at €700m this year, is more upbeat: “A lot of capital is being raised for the Italian private equity sector. Nonetheless, the level of competition for dealflow is low compared with the more mature markets of the US and UK and the expectation is that the Italian domestic market will continue to grow.”

However, concerns surrounding oversupply of capital have affected the way funds, including Investitori Associati, position themselves. Despite being nearly three times oversubscribed Investitori limited its fund to €700m at investors’ bidding. At the time, Miccinelli conceded that following discussions “a consensus emerged that a megafund would be difficult to invest successfully”.

Opera, a mid market private equity firm backed by the Bulgari jewellery family, encountered different problems during its drawn out struggle to raise a €225m second fund. Earlier this year Francesco Trapani, the chief executive of Bulgari, was complaining that the fallout from Parmalat had made it more difficult to secure capital from abroad.

After 18 months of fundraising Opera had only managed to raise €90m in commitments when Bear Stearns came to the rescue with an agreement to allocate up to €200m alongside the fund.

Antonio Perricone, a partner at BS Private Equity, which closed its €550m fund last year, said: “Well-established Italian firms that are known in the market and present a strong track record should have no problem raising funds.”

Bankers agree that the Parmalat scandal, though limited to one company, may have broader ramifications.

Even if the fallout is more imagined than real, bankers and private equity professionals are concerned that Parmalat may have dented confidence, but only at the larger end of the Italian market.

Roberto Italia, a partner at Henderson Private Capital in Milan, said: “In the short term, Parmalat-like factors may hinder the ability to pursue larger deals from a structuring point of view.

“However, they may actually favour the pursuit of smaller transactions where the typical lenders are banks that now require the presence of an equity layer ahead of injecting fresh capital from their own balance sheet.”

Perricone said BS’s supply of deals was strong and with the lack of corporate competition for mergers and acquisitions, private equity firms were driving the M&A markets.

He said: “Private equity firms are the most liquid entities operating in the Italian market and I expect our share of the M&A market to increase substantially.”

Henderson’s Italia agreed that Italy’s staple mid-market remains busy: “2004 is likely to be as active as 2003 in terms of volume as small to medium-sized companies gradually shape up to make themselves attractive to the private equity community.”

Owners and managers pruning their businesses to attract private equity interest is another dynamic in the Italian market. Fabio Massimo Giuseppetti, a principal at Palamon Capital Partners, said Italian businesses were becoming increasingly entrepreneurial in their approach and private equity firms needed to be equally hands-on and inventive to keep the pace in the market.

He said the days were largely over when private equity firms acted as little more than lenders to cash-strapped industrial companies. Today, private equity firms are looking for businesses they can grow through injecting what Giuseppetti called “entrepreneurial substance” as well as cash.

Implicit in this new attitude is the acknowledgement that Italian industries tend to be highly fragmented. Giuseppetti said: “In many Italian industries you can’t buy the market leader so you have to make it. You have to buy one company and transform it until it is ready to be sold or floated.”